Subcontractors write-off £2.8bn in bad debt each year

18-Jun-2018

Customer non-payment continues to hamper the
growth of small subcontractors working in the UK construction sector, according
to a study by Bibby Financial Services and The Vinden Partnership.

Findings of the Subcontracting Growth 2018
research, undertaken in the aftermath of the collapse of Carillion, reveal that
three-fifths of subcontractors (60%) have suffered from bad debt in the last 12
months, with the average firm writing-off £16,149 each year.

Specialist finance director at BFS, Kash Ahmad,
commented:

“Bad debt is a serious issue for many
construction businesses and, across the entire sector, more than £2.8bn is
written-off each year, representing a significant economic leakage.

“Bad debt occurs due to insolvency in the
supply chain, protracted default or dispute and the issue is particularly
challenging for smaller firms that have already footed the bill for raw
material and labour costs. This places a massive strain on these businesses,
sometimes even causing viable firms to fold. For many, bad debt is the hidden
cost of doing business.”

Almost a fifth of subcontractors (17%) said the
most common reason for not receiving the full amount billed was due to a
customer going out of business. A change in the scope of work part way through
a project (8%), queries over the quality of work (6%) and disputes over
contracts (6%) were also among the top reasons firms would lose money.

More than two-fifths of businesses (44%) said
that construction contracts are difficult to understand, with less than one in
ten firms (6%) seeking expert advice.

Kash added:

“The Carillion situation has highlighted three
fundamental issues in the sector: endemic late payment, bad debt and complexity
of contracts. Each of these issues needs to be tackled by both the public and
private sectors. However, there are also measures that small businesses can
take in order to protect themselves against such issues. Such measures can
include conducting thorough debtor reviews, seeking advice on contract
negotiation and considering bad debt protection.”

“Making full and correct payment in accordance
with contracts is a fundamental pillar of the government’s construction supply
chain payment charter, but it is clear that this simply isn’t happening. Unless
something more tangible is done, the growth of tens of thousands of small
construction firms will continued to be stifled.”